Home loan: Know how it is calculated and other details

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Securing a home loan from a bank is an achievement for many since it unlocks the possibility of a dream home. But how do banks calculate the amount of loan one is entitled to?

Home loan comprises the biggest chunk of retail loans. According to Reserve Bank of India (RBI) data almost 65-67% of the total Indian loan market is dominated by home loan.

The total volume of home loan market in the country is about Rs 16 trillion, which is dominated mainly by SBI, HDFC and LIC Housing Finance.

Thumb rule

While deciding the quantum of loan to be granted for housing finance, banks generally follow a specific rule issued by RBI. Loan to Value (LTV) ratio is the most important thing on which the amount of loan depends.

According to RBI, if the cost of an apartment is Rs 20 lakh, the LTV should be less than 90%. It means that the loanee will get a maximum of Rs 18 lakh loan for a home priced Rs 20 lakh.

For a home loan between Rs 20 lakh and Rs 75 lakh, LTV should be less than 80%. And if the cost of the property is more than Rs 75 lakh, LTV should be less 75%, the central bank said.

In other words, it means if a person is going to buy a home priced at Rs 60 lakh, then he will get a maximum of 80% of Rs 60 lakh, or Rs 48 lakh as loan.

On the other hand, if a home is priced at Rs 1 crore, the bank will not sanction anything more than Rs 75 lakh as loan.

This figure might vary person to person and upon the amount of loan but the minimum loan amount must not less than the LTV.

However, this is the maximum amount. Whether one would be eligible for the maximum amount would depend on other factors such as income and ability to offer collaterals against the loan.

RBI guidelines

“In order to have uniformity in the practices adopted for deciding the value of the house property while sanctioning housing loans, banks should not include stamp duty, registration and other documentation charges in the cost of the housing property they finance so that the effectiveness of LTV norms is not diluted,” RBI guideline said.

However, in cases where the cost of the property does not exceed Rs 10 lakh, the bank might add stamp duty, registration and other documentation charges to the cost of the house for the purpose of calculating LTV ratio.

Home loan market

Until FY21, SBI had a loan book of Rs 5 trillion and HDFC had a book of about Rs 5.5 trillion. Together these two companies have a 70% share of the Indian home loan market.

As much as 47.5% of the home loan applications are below Rs 25 lakh, whereas 24.6% of the loan applications are for amounts between Rs 50 and Rs 75 lakhs.

Applications seeking loans between Rs 75 lakh and Rs 1.1 crore comprise 14.6% of the applications.

Home loans for the amount between Rs 25-50 lakh showed a 22.65% between FY19 and FY20.

Rates

To resuscitate declining demand, home loans are being offered at extremely low rates of interest.

SBI offers a home loan rate of 6.7%. On the other hand HDFC offers 6.75% interest.

SBI plans to increase the loan book from Rs 5 trillion in FY21 to Rs 10 trillion by FY26.